Is the Non-Custodial Parent a Parent for Federal Student Aid Purposes?

I am divorced and the custodial parent of two children who live
with me. Both kids have Coverdell Education Savings Accounts. My
soon-to-be college student daughter’s Coverdell lists her father (my
ex-husband) as the account owner. My son’s Coverdell lists me as the
account owner. How do I report my daughter’s Coverdell on the FAFSA?
The fund will not give me the account value because my name is not on
the account. Do I list my 15 year-old son’s Coverdell on my
daughter’s FAFSA?
— Julianne C.

The College Cost Reduction and Access Act of 2007 (P.L. 110-84)
amended the treatment of qualified education benefits in section
480(f)(3) and (j)(2) of the Higher Education Act of 1965 effective
with the 2009-10 award year. Qualified education benefits are treated
as an asset of “the student if the student is an independent student”
and as an asset of “the parent if the student is a dependent
student, regardless of whether the owner of the account is the student
or the parent.” Qualified education benefits include 529 college
savings plans, prepaid tuition plans and Coverdell education savings
accounts.

Your ex-husband is not considered a parent for federal student aid
purposes. Only you (and your current spouse, if you have remarried)
are considered a parent on the FAFSA. As such, any qualified education
benefits owned by your ex-husband are not reported on your daughter’s
FAFSA. It is important to distinguish between custodial accounts,
where your daughter is both the beneficiary and the account owner
(even if your ex-husband is the custodian), and regular non-custodial
accounts, where your daughter is the beneficiary and your ex-husband
is the account owner. The former get reported as an asset on the FAFSA
while the latter do not. So your daughter’s Coverdell account does not
get reported on her FAFSA because it is owned by your ex-husband.

Your son’s Coverdell account, on the other hand, does get reported as
a parent asset on your daughter’s FAFSA (and eventually on his FAFSA)
because it is owned by you.

Distributions from a qualified education benefit that are not
includable in gross income are not counted as estimated financial
assistance. They are also not normally counted as untaxed
income. However, guidance published by the US Department of Education
in the 2009-10 Application and Verification Guide indicates that “when
the owner is some other person (including a non-custodial parent),
distributions from these plans to the student count as untaxed income,
as money received.” Thus distributions from your daughter’s Coverdell
will be reported as untaxed income to her on the next year’s FAFSA,
while distributions from your son’s Coverdell will not be reported on
his FAFSA.

The potential treatment of distributions as untaxed income generally
has a greater impact on aid eligibility than the potential treatment
of the account as a parent asset. (Although the qualified education
benefits might be treated as parent assets on every child’s FAFSA, one
would need to have more than about eight children for the combined
impact of the assets on aid eligibility to exceed the impact of the
distributions on aid eligibility.)